Daily notes – Challenger, Pinnacle & Sims

Challenger (CGF) – Equity market blowback… Pinnacle Investment Management (PNI) – Distribution continues… Sims Metal (SGM) – Margin compression and Turkey

Challenger (CGF) – Equity market blowback

Challenger has reported investment losses during the H1 of $153m, mainly due to lower equity markets (-$117m) and wider fixed income credit spreads (-$34m), which is expected to wipe out the bulk of the company’s H1 net profit. Whilst the structural story remains intact, these hits to the investment portfolio are a timely reminder of just how exposed this company is to the performance of its investment portfolio and financial markets in general.

The stock has been in a well defined down trend since the share price peaked in December 2017 and is now down nearly 50% from its high.

Pinnacle Investment Management (PNI) – Distribution continues

It’s always interesting when a company gives an update on their financial performance that on the surface looks positive enough, however the stock gets heavily sold down. In this case Pinnacle reported NPAT of $10.1m, up 25% on the pcp and FUM of $46.7b, up $8.7 billion or 22.9% over the half.

It’s clear that the stock has been under heavy distribution since peaking in early October and is now down nearly 50% from its high. Diluted EPS was expected to grow by 14%, as opposed to the 25% headline number – this due largely to the increased shares on issue resulting from the capital raising completed last year.  

The slowdown in the growth of retail FUM ($1.4b during H1 compared to $1.35b in the pcp) coupled with the not to be repeated Firetrail institutional raising accounting for the bulk of inflows ($3.6b of the $bn) probably has the market wondering whether growth in inflows can continue at the same rate as it has over the last 5 years, and if not, whether the stock is worth such a high multiple of earnings.

Sims Metal (SGM) – Margin compression and Turkey

This latest update issued by Sims highlights what a tough business this is. High capital expenditure requirement, low gross margin and heavily dependent on an operating environment wholly outside of your control, such as for instance, the political situation in Turkey (!).

H1 EBIT is expected to come in at $109.8m compared to $125m during the previous corresponding period, representing a fall of 12%. This despite reporting sales volumes 3% higher than the pcp. Volatility in the market has steadily increased over 1H due to the uncertainty surrounding tariffs, trade wars and Turkey’s position in the market and this has had an effect on pricing and margins. There is also the issues surrounding China’s prohibition of certain scrap materials and newly imposed strict standards on contaminant thresholds on all scrap, including metal.

It’s unclear how this will affect the Sims narrative. What is clear, is that there is a lot of uncertainty surrounding the external operating environment of this company. And markets have difficulty pricing uncertainty, which usually leads to trends developing as news is digested and assimilated, under-reacted to and then over-reacted to. Sims is clearly in a downtrend, having now fallen nearly 50% from its high reached in June 2018. It’s hard to be upbeat about the company’s prospects at this point however this can change quickly if a few of these external issues begin to resolve themselves.

By Danny Sandler

Founder of Ocean Asset Management.